Wednesday, February 19, 2014

Tax Court Ruling and IRS Rollover Guidance Don’t Add Up

A recent U.S. Tax Court ruling has set a lot of heads spinning in the IRA administration world, running counter as it does to more than two decades of IRS guidance.  In the case Bobrow v. Commissioner, the Court looked at a situation where the taxpayer, Mr. Bobrow, had made two IRA rollovers within a 12-month period.  Each rollover consisted of assets distributed from a different IRA.  The Court disallowed Bobrow’s IRA rollover on the grounds that he was limited to one rollover per taxpayer per 12-month period, not one rollover per IRA. 

Why is this ruling drawing so much attention?  Primarily because it runs completely contrary to long-issued guidance provided by the IRS, the very agency that is now advocating this new position without any prior warning.  The ability to execute IRA rollovers on a one-per-IRA basis has been described in detail in IRS Publication 590, Individual Retirement Arrangements (IRAs), for at least 20 years, that evidence readily available even now at the IRS’s own web site.  It is not conveyed in a mere statement, but in detailed examples provided to explain the sometimes-misunderstood rollover limitations.  The IRS’s own model IRA documents, on which millions of IRAs are based, state in their instructions “For more information on IRAs…see Pub. 590…”

It is relevant to share the IRS’s own unequivocal guidance on the subject here.  Looking back to 1994, the oldest version of Publication 590 posted at the IRS web site, we find the following.  “You can take a distribution from an IRA and make a rollover contribution to another IRA only once in any one-year period.  … This rule applies separately to each IRA you own.  For  example, if you have two IRAs, IRA–1 and IRA–2, and you roll over assets of IRA–1 into a new IRA–3, you may also make a rollover from IRA–2 into IRA–3, or into any other IRA within one year after the rollover distribution from IRA–1. These are both rollovers because you have not received more than one distribution from either IRA within one year.”  The examples, now even more detailed, continue in Publication 590 up to the most current version.

Some point out that IRS consumer publications, like Publication 590, should not be given credence when compared to the Internal Revenue Code, regulations, revenue rulings, notices, or the like.  To which I answer: how can this agency have spent uncounted taxpayer dollars over the life of this publication—a publication that now runs to 114 pages—for us to be told that its contents cannot be relied on by taxpayers?  Are we not to take seriously the description on the cover that flatly says “For use in preparing 2013 returns?”  No citizen should be expected to go beyond an official IRS tax publication and conduct research in the Internal Revenue Code and arrive at a conclusion different than the IRS published guidance.  More broadly, what is the purpose of the numerous IRS publications on qualified plans, 403(b) plans, armed forces tax issues, education benefits, health and medical tax benefits, and more, if taxpayers cannot rely on their contents regarding potentially critical tax issues?

In rendering its Bobrow v. Commissioner ruling, the Tax Court opinion stated that it relied on the “plain language” of the Internal Revenue Code, and we are objective enough to see how the Code could be construed as limiting annual IRA rollovers to one per taxpayer, instead of one per IRA.  That said, when a regulatory body publishes their interpretation of a code section, taxpayers should and really must be able to rely on it. 

What's more, it seems unconscionable that the same agency that cites “equity and good conscience” when granting taxpayers extensions to the 60-day rollover limitation, would now ignore decades-worth of its own widely promulgated and unequivocal written guidance, basing a new rollover interpretation on Tax Code language it has ignored for that entire period.  Where, pray tell, is equity in this IRS Tax Court litigation, this disavowal of longstanding guidance to suit some short-term prosecutorial aim?

Though few have pointed it out following this Tax Court ruling, there is more one-per-IRA IRS guidance than just Publication 590’s declaration and examples.  The IRS actually drafted proposed regulation language that mirrors the Publication 590 guidance.  Proposed Treasury Regulation 1.408-4(b)(4) states with respect to the one-per-year limitation that “this rule applies to each separate individual retirement account, individual retirement annuity, or retirement bond maintained by an individual.”  This language was proposed in 1981, and undoubtedly influenced IRS technicians who drafted the rollover references now in Publication 590.

With the current high priority the Obama administration seems to be placing on helping more Americans save for a secure retirement, I would find it extremely contradictory and disappointing if the IRS were to reverse itself and its own plan language guidance, and place additional limitations on IRA transactions that this agency has blessed for more than two decades.  

It is my hope that the Tax Court ruling in Bobrow will be overturned, and the IRS either reaffirm the rollover interpretation it has consistently and unequivocally supported or apply this “new” interpretation only on a go-forward basis with an announced future effective date.  

Thursday, February 6, 2014

Hopefully myRA’s Ends Will Justify its Unprecedented Means

By now the term “myRA” has probably been absorbed into the consciousness of most who serve the retirement industry, and has generated more “buzz” than any White House proclamation in recent memory. 

How are we to react to news of this administration-proclaimed retirement saving experiment?  Is it a threat to other tax-favored savings arrangements?  Is it a stroke of genius that will fill an unmet need for a segment of the working population?  Is it politically motivated, at a time when the administration has been unable to advance its agenda in Congress?

According to a White House fact sheet, a myRA (presumably standing for “my retirement account”) would allow those without a retirement plan at work to begin saving in very small amounts in government-backed, principal-guaranteed accounts.  Upon reaching $15,000, balances would be transferred to a commercial Roth IRA.  Ostensibly, there would be minimal fuss for employers and no risk of loss for employees, at least until a wider selection of investments became available after transfer to a Roth IRA.  It is to be a pilot program, limited to those whose incomes do not exceed $191,000, and whose employers enroll by the end of 2014. 

Many analyses have appeared in the media, some providing more of the still-incomplete details on this program.  It is not my purpose to replicate these analyses here, or come to any final conclusions on the questions we have raised above.  I do not wish to rush to judgment; it remains to be seen whether this pilot program really IS different enough—and sufficiently needed—to serve a genuine purpose as a missing link in the retirement saving chain.  What I wish to comment on here is the precedent, maybe unsettling to some, this executive action may represent, creation of a new type of retirement account by “decree” rather than a thoughtful legislative process. 

In my long experience serving and observing the retirement industry, I can remember no previous presidential act that created a program of this nature by executive order.  The now-barely-remembered Medical Savings Account, or MSA—since supplanted by the Health Savings Account—began as a pilot program.  But this pilot program was created by Congress.  We understand that the current climate in Congress is resistant, if not actually hostile, to compromise, which makes meaningful lawmaking very difficult.  But that does not alter the fact that certain functions in our democracy are generally viewed as the province of the constitution’s lawmakers, the definition of which does not include the president, or the judiciary for that matter.  The question one might ask is even though “authority” says the President could, should it have been done in this manner.  Will this have the stated desired effect of increasing retirement savings or will it create more division within a political environment full of strife already. 

My concern is not simply one of form, or appropriate roles under the constitution.  The process by which laws are proposed and passed by Congress is as purposeful as it sometimes is frustrating.  There is a reason why laws are the product of a process involving the nation’s political parties, and its two lawmaking bodies—each of which is elected by very different constitutional procedures.  The process gives at least some measure of assurance that a proposal will be scrutinized, debated, its tax impact calculated and social impact examined.  A law-in-progress will go through one or more committees that have not only jurisdiction, but hopefully expertise on the matter at hand.  In short, even a new law will have had an opportunity for refinement, and will have a procedural history that can be of great importance to interpreting and carrying out its intent.

An executive order, on the other hand, may have few or none of these things.  Certainly it will be lacking in scrutiny and debate, little opportunity for refinement, and no history to help in its interpretation and execution.  The extensive body of U.S. retirement plan law and regulations did not have origins as a state-of-the-union surprise.  As imperfect as this body of law might be, it can never be characterized as arbitrary, unilateral, or as legislating by decree. 

Now, as always, I am in favor of giving American workers any and all useful tools to help them save for retirement.  If implemented, I hope the myRA proves to be such a tool.  But I find it hard to ignore the possibility that its genesis may set a precedent that future leaders may use as a shortcut or end-run around the proper body—Congress—in which this responsibility should reside.